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Commodity Market - An Overview

Definition :

"Commodity markets are markets where primary products are exchanged. These raw/primary commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts".

Early history of commodity markets

Historically, dating from ancient Sumerian use of sheep or goats, or other peoples using pigs, rare seashells, or other items as commodity money, people have sought ways to standardize and trade contracts in the delivery of such items, to render trade itself more even and predictable.

Commodity money and commodity markets in a basic early form are believed to have originated in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Preserved in clay vessels with a certain number of such tokens, with that number written on the outside, they represented a promise to deliver that number. This made them a form of commodity money - more than an "I.O.U." but less than a guarantee by a nation-state/bank. However, they were also called to contain promises of time and date of delivery - this made them like a modern futures contract. Despite of the details, it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it, at which point the number or terms written on the outside became subject to doubt. Ultimately the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting. Though the Commodity status of living things is always subject to doubt - it was hard to validate the health or existence of sheep/goats. Excuses for non-delivery were not unknown, and there are recovered Sumerian letters that complain of sickly goats, sheep that had already been fleeced, etc. If a seller's standing was good, individual "backers" or "bankers" could decide to take the risk of "clearing" a trade. The examination that trust is always required between markets participants later led to credit money. But until modern times, communication and credit were primitive. Classical civilizations built complex worldwide markets trading gold or silver for spices, cloth, wood and weapons, most of which had standards of quality and timeliness. Considering the many risks of climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the trade routes, it was a major focus of these civilizations to keep markets open and trading in these scarce commodities. Reputation and clearing became central concerns, and the states which could handle them most effectively became very influential empires, trusted by many peoples to manage and mediate trade and commerce.

Modern Commodity market

The modern commodity markets have their roots in the trading of agricultural products. While wheat and corn, cattle and pigs, were generally traded using standard instruments in the 19th century in the United States, other basic foodstuffs such as soybeans were only added quite recently in most markets. For a commodity market to be established there must be very wide consensus on the variations in the product that make it acceptable for one purpose or another. The economic impact of the growth of commodity markets is hard to misjudge. Through the 19th century "the exchanges became effectual spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade.

Size of market

The trading of commodities includes direct physical trading and derivatives trading. The commodities markets have seen a rise in the volume of trading in recent years. In the 5 years up to 2007, the value of global physical exports of commodities increased by 17% while the notional value outstanding of commodity OTC derivatives increased more than 500% and commodity derivative trading on exchanges more than 200%. The notional value outstanding of banks OTC commodities derivatives contracts raised 27% in 2007 to $9.0 trillion. OTC trading accounts for the majority of trading in gold and silver. Overall, precious metals accounted for 8% of OTC commodities derivatives trading in 2007, down from their 55% share a decade earlier as trading in energy derivatives rose. Global physical and derivative trading of commodities on exchanges increased more than a 3rd in 2007 to reach 1,684 million contracts. Agricultural contracts trading increased by 32% in 2007, energy 29% and industrial metals by 30%. Precious metals trading grew by 3%, with higher volume in New York being partially offset by declining volume in Tokyo. Over 40% of commodities trading on exchanges was conducted on US exchanges and a quarter in China. Trading on exchanges in China and India has gained in importance in recent years due to their emergence as vital commodities consumers and producers.